Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

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Notes

The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds and The 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

See Status of the Social Security and Medicare Programs: A Summary of the 2004 Annual Reports, Social Security and Medicare Board of Trustees.

The Figure is based on Table IV.B1 in The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.

Some argue that Trust Fund balances represent savings, because the national debt held by the public would be higher by the amount of the Trust Fund had the surpluses not existed. However, whether or not the Trust Funds are actually savings, they do not provide resources to the federal government.

Status of the Social Security and Medicare Programs: A Summary of the 2004 Annual Reports, Social Security and Medicare Board of Trustees, page 9.

From The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, Table IV.B8.

In fact, in a properly designed system, the new generation would make a net contribution to the system that is equal to the net cost of the current generation.

In addition, the present value calculation underlying the numbers in Table I is done as if future generations (those 14 and younger today and those yet to be born), set aside their tax payments in a fund that grows at a real interest rate of approximately 3 percent between 2004 and their retirement. Thus, the first group of retirees reaches the normal retirement age in 2057, with only disability and survivor's benefits being drawn from the fund during the intervening years. With this understanding, it is clear that the system is not solvent for the new entrants, given that the taxes they pay during their working years will be used to pay benefits of retirees during those years.

Even this measure is optimistic because it assumes that all surpluses between now and 2018 are actually invested in assets that yield a real rate of return of 3 percent per annum. If the surpluses are spent on other government programs, the unfunded obligation rises to $12.7 trillion.

From The 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Tables II.A2, II.A4, II.B8, II.C15, II.C18, and II.C21.

If we continued to dedicate the current general revenue transfer of 0.95 percent of GDP to Medicare in all future years, the combined funding would cover 57, 41, and 33 percent of the program's costs in 2025, 2050, and 2075, respectively. This indicates that in future years Medicare will require significant funding in addition to what is currently committed.

From The 2004 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, Tables II.B12, II.C17, and II.C23.

Even treating the small-Part A Trust fund as an offset, only reduces the obligation to $21.8 trillion.

One of the appendices to the Medicare Trustees Report discusses the relationship between the Social Security and Medicare programs and the federal budget. In that appendix, the 75 year group obligations are presented from both the budget and trust fund perspectives. The tables here present the funding requirements from a total budget perspective. One may argue that because SMI Part B is already receiving a transfer from general revenues and the $23.2 trillion shortfall includes these transfers, then the added burden is less than $23.2. In 2004, the general revenue transfer to Part B was equal to 0.95 percent of GDP. If the 2004 transfer of approximately 0.95 percent of GDP is considered as a permanent commitment for future funding amounting to 0.95 percent of GDP in all future years, the Medicare Part B burden is reduced to $14.5 trillion.

Over the last 50 years the federal income tax receipt share of GDP has been remarkably stable with fluctuations primarily related to the state of the economy rather than tax code changes. Income tax receipts have averaged 10.89 percent of GDP with a high of 13.4 percent in 1954 to a low of 8.5 percent in 2003. Our calculations assume income tax receipts will continue to average 10.89 percent of GDP in the future. The values in the figure can be interpreted as the share of future federal revenues that will be required to fund Social Security and Medicare in addition to their dedicated funding sources.